Uber is the biggest unicorn on the private market right now, and it's had an incredibly rough 2017, replete with scandals and money trouble.
In this clip from Industry Focus: Tech, market analysts Dylan Lewis and Evan Niu take a deep dive into the significant business model problems that Uber is facing; why even if the company goes through with an IPO, investors might want to stay away from this one; how Lyft fits into the picture for Uber and the ridesharing market; and one potential spot of hope on the horizon for both Uber and Lyft.
A full transcript follows the video.
This video was recorded on Dec. 8, 2017.
Dylan Lewis: Evan, for the second half of the show, we're talking about the biggest unicorn out there, the biggest start-up with over a $1 billion valuation, and that is none other than Uber. They've been head of the pack for quite some time.
Evan Niu: Yeah, Uber is just insane. It's so expensive. I honestly sometimes wish I could short them. Uber, in my opinion, is one of the most unethical companies in recent memory. It's just so ruthless and they seem to have no scruples and they'll do whatever it takes. I just don't think it's a sustainable approach. Even before you get to the numbers, the financials, culturally speaking, they're just such a terrible company.
Lewis: They have had a really rough 2017. Why don't we give a couple of bullet points on exactly what happened for the company? You have these series of reports of the workplace culture of sexual harassment. You have issues with the company skirting local law enforcement in some app features that were available to drivers. You have a lawsuit from Google's self-driving car project, Waymo, about intellectual property. All of that led to founder Travis Kalanick stepping down as CEO due to this flurry, basically an avalanche, of really bad PR for the company.
Niu: I'm actually kind of surprised all this stuff didn't culminate until this year. This stuff has been going on for many years at Uber. They've always been ridden by scandals. There was a scandal a couple of years ago that you and I were talking about earlier where they were said to create a $1 million smear campaign against a journalist for writing negative things about them. I mean, what company does that? [laughs] And that was a couple of years ago. Even still, Uber has continued to march higher and higher in valuation, continue to grow their position in market share because they're so aggressive. These scandals haven't really taken a toll until this year, which in my mind is kind of late.
Lewis: These scandals have done two things that you don't see all that often for an industry-leading company. One is, given they're private, they actually had a revision down in their valuation. They're currently around a valuation of around $60 billion or so. At times, it seems like they were slightly above that based on some insider trades. Given a recent interest in investment from SoftBank, which is this Japanese telecom conglomerate, they're looking to buy $7-10 billion in shares from the company, and they're going to be doing so from early investors that are taking a 30% haircut on their shares. You don't very often see a private, growing, big-time company like this have people get access at a reduced rate. Typically, you see up rounds of valuations and up rounds of valuations. So, that's point No. 1 there. And point No. 2 that you don't see all that often is, you had a major exodus of people who saw this bad press, saw what a toxic environment there was at this company, and decided, we're going to go over to their competitor, Lyft. We're going to abandon Uber. That was another big PR thing that they had to overcome this year.
Niu: Yeah, they're in the process of potentially having this down round. Generally, there have been a lot more down rounds where valuations come down in the private market over the past two years or so, because this unicorn market has gotten a little overheated. And Uber is certainly the biggest example. SoftBank, as you mentioned, is doing this tender offer, where they're trying to buy shares, I think the valuation is around $50 billion vs. the prior valuation of $60-70 billion. So, that doesn't really inspire a lot of confidence. But, they are trying to accumulate a position. I think they're shooting for a 15-20% stake. But, it's also important to note that, through a tender offer, they're buying their shares off of the existing shareholders, so Uber itself won't get any of that money. They're not raising capital through this. So, it's this private negotiation where SoftBank is trying to get investors to tender shares.
Lewis: Yeah. You hear, these down rounds, it's not something that we see all that often. Looking at the financials for this company, in spite of all these crazy things that have hit them this year, they're still growing, and they're still growing very well. In 2016, we saw net bookings of $20 billion, revenue of $6.5 billion on that. And net bookings is basically what was booked as rides on the app itself. On all of that income, losses of $2.8 billion. You go to this most recent quarter that we have access to, Q3 2017, they posted net bookings of $9.7 billion, which is up 12% year-over-year, and you compare that, that's basically half of what they did in 2016 in one quarter there. Revenue of $2 billion. Again, losses of $1.5 billion. So, you show massive top line growth here, and, it seems, widening losses as well.
Niu: Right. They just burn so much cash at this incredible rate. I see Uber as, they're subsidizing rides using venture capital money in an effort to be super aggressive on pricing in order to grow their market share and take down all their rivals. But I view it as unsustainable because they're losing so much money. There's this good quote that's relevant here. We were talking about Sarah Lacy, she said in an interview lately, "The thing that's going to kill Uber has nothing to do with who's at the company, and it's not going to do with the scandals, it's not going to do with any of these. The thing that's going to kill Uber is when Uber finally has to charge what it costs to get a car to you." And that kind of speaks to the underlying economics of how Uber operates. They're pricing below cost, it's essentially a loss leader, where they're losing incredible amounts of money. They're growing market share and growing their top line, but they're on a really unsustainable path.
Lewis: And early on, that narrative made sense for Uber, because they were selling investors on this idea that, we're going to price very competitively, and sometimes even take some losses on rides, so that we can build out our driver network, build out our services, and create this massively disruptive transportation system. And that worked really well. It got them all these drivers in all these different cities, it helped with their international expansion. But what then happened was, they had competitor Lyft basically do the same thing. And once you have a network of drivers built out, there's no exclusivity with those drivers. I've gotten into so many Ubers where they have the Uber sticker, but they also have a Lyft sticker, and maybe they have a Via sticker -- that's a big service here in D.C. They can drive for any of them, and the drivers themselves are going to push toward whichever platform is giving them the best deal. That makes it really tough for them to ever hike prices back up to where they should be so that they can actually start making margins on all those rides.
Niu: Right. I think that's the sad thing about this whole situation. Uber has single-handedly created this perception in people's minds that rides should cost less than they actually do. And because of their aggression and their size, they force their rivals like Lyft, but also this whole industry, to cut their prices just to compete, and it sets the entire industry on this unsustainable path. If people think rides should cost $X, but that's way below what it should cost, it's really hard to reverse course on that value perception from the consumer. If I'm used to paying $20 for a ride, but if the ride should cost $30... it's really hard, how do you go back from that?
Lewis: It's tough to raise prices once you set certain expectations for what something should cost. The impact, when you look at Lyft's financials, too, we have access to those, you go to 2016, they booked $700 million in revenue and lost $600 million on that. So, clearly the economics aren't looking all that great for them. The company has said that they are looking to be profitable by 2018, which seems kind of crazy to me, given the pricing environment that these two guys are in, and what they've created for themselves as a market.
Niu: I think the one thing that really has the potential to change everything, quite literally everything, and this is obviously what everyone is talking about, autonomous driving, which has the potential to dramatically shift the cost structure for these companies, because you're no longer relying on these contractor drivers, which is a huge part of the cost structure. And if you can shift to this first party corporate-owned fleet of autonomous cars, then everything turns. The entire economics of the industry completely change. Of course, that's many years off, and there's so much uncertainty about who's going to get there first, if people get there what technology they're going to use, it's really too early to call. But, just to acknowledge that that has the potential to dramatically shift economics in favor of sustainability for these companies.
Lewis: Yeah. Both of these companies as they currently exist, I don't think, can continue running for the next 15 years. I just don't think the money is going to be there for it to happen. Were they to basically be able to create a car and pay $X to create that car and then know that that car is going to have a useful life that earns it 3-4X in fares, that's where the network of transportation becomes really compelling. I think something else with these businesses to keep an eye on is, what are they able to leverage this network to do outside of just getting people from A to B? If they can use this as last mile logistics, I'm sure they're also working on other alternatives that aren't as clear to you and me. But, I think, kind of like Spotify, these two companies as they currently are don't look like great long-term businesses. A lot of things have to change for the economics to look better.
Niu: I would not touch Uber at all. If they went public at these levels, I would have zero interest in them, not only because of the financials, but again, from all this corporate culture stuff. You have to really think sustainably in terms of ethics, [laughs] just basic ethics, and Uber has a horrendous record when it comes to ethics and being a good person, being a good company.
Lewis: On the note of autonomy, too, Lyft is partnered up with GM for some of their autonomous efforts. Is that right?
Niu: Right, GM has a big stake, they invested in Lyft a few years ago, so they have an ongoing relationship there. GM is obviously developing a lot of self-driving autonomous technology as well. Then, you also have to talk about Tesla, because Tesla is in there trying to create their own thing, I'll tell him it's cars, and theirs will be more like a network where the car's original owner, assuming that they can get their cars to full autonomy, then you have a whole network of private owners that allow their cars to go out there autonomously and provide transportation at no real cost of the driver, and you can generate some revenue there. So, that would be a decentralized network, but owned and operated by Tesla where the owners get a cut or something. It's not clear yet, but that's the general thinking. Then, of course, you have Waymo, who's suing Uber for stealing trade secrets. Waymo is a pretty mature subsidiary at this point of Alphabet. They've been around for 10 years or so. It goes back to this culture thing. It just came out that Uber has this corporate espionage team that was specifically trying to steal trade secrets from other companies. So, Waymo is in there too trying to get there first. It's really a race to see who gets to autonomy first and who can actually put together the operations like the network, and actually get that part going, as well as the economics down.